Life insurance is typically in the form of a contract between an insurer and a policy owner. By the terms of the contract, the insurer agrees to pay a sum of money upon the death of the insured, i.e., the person whose life is insured. In return, the policy owner pays the insurer a premium. The premium is paid in a lump sum and/or is paid periodically at some interval. The policy owner and the insured may or may not be the same person.
Over the course of the term of a policy, the health of the insured person may well change. Some life insurance companies provide for such a change in health. For example, some life insurance companies offer acceleration of the death benefits for terminal illness and chronic illness and may permit the borrowing of amounts in excess of the cash value of the policy, on the basis of re-underwriting.
On the periphery of the life insurance industry, some companies also provide what has been characterized as a “life settlement.” A life settlement is a mechanism by which a company (often a third party) offers a cash payment to a life insurance policy owner for an insured who has suffered a decline in health/life expectancy. The third party typically pays more to the policy owner than the cash value of the policy, i.e., the dollar amount that the insurer is contractually obligated to pay to the policy owner who surrenders his or her policy. That is, in a life settlement arrangement, the purchaser typically becomes the new owner and beneficiary and is responsible for future premium payments. Life settlements have shortcomings, including expenses associated with the life settlement transaction, inconsistency in the life settlement process, unavailability of partial life settlements, questions about insurable interests of the new owners, state law timing limitations and other shortcomings.